For multiple reasons, buyers usually prefer to structure a transaction as an asset sale rather than a stock sale. In certain situations, an asset sale allows a buyer to purchase the company without fear of unknown or contingent liabilities. The reason most often cited for a buyer’s decision to purchase assets versus stock is the ability to amortize the goodwill portion of the purchase price.
To illustrate, assume the sale of a distribution company with the following assets:
Further assume that the buyer offers to purchase the assets of the distribution company for $20,000,000 and assume the existing accounts payable and accrued expenses totaling $2,000,000. For tax purposes, the parties agree to allocate the purchase price at book value. Goodwill related to the transaction is calculated as follows:
Goodwill is amortized over a period of 15 years. A goodwill allocation of $8,500,000 represents an annual tax deduction for the buyer of $566,667 for each of the next 15 years. Assuming a marginal tax rate of 40% and the buyer’s cost of capital of 8%, the tax savings or value of the deduction is $226,667 per year with a total net present value of the deduction of $1,940,000.
As a result, the value of structuring the transaction as an asset purchase creates a savings of $1,940,000 for the buyer. This savings is one reason a buyer can justify a higher purchase price in an asset sale versus a stock sale.